Personal loans are getting cheaper!

Personal loans have been pretty pricey since the credit crunch, but the good news is they've started to get cheaper. Here's a look at the market's top five deals.

Up until recently, personal loans had been badly affected by the credit crunch. With banks keeping their purse strings as tight as possible, there was little incentive for them to offer you and me competitive rates on borrowing.

As I reported in May, the interest rates on some personal loans had leapt by a shocking 44% since 2007.

However, there are now signs the personal loans market may be waking up again. Several loan providers have recently cut their rates, and the market's leading deals are getting cheaper.

In this article, I'll look at the five cheapest loans available today and explain what you need to bear in mind when applying for one.

Better-looking loan rates

In the table below, I've compiled information on the market's lowest-rate personal loans. All the figures are based on an individual taking out a loan for £10,000 and spreading their repayments over five years.

I have also assumed in the examples below that no repayment holiday would be taken by the person who might choose these loans. In other words, the figures are based on the assumption that an individual with each loan would begin repaying it straight away.

* The loans in this table are organised by APR, then TAR. TAR figures have been rounded to the nearest £1. All rates and information were correct on the day this article was published.

As you can see, three of the five loans now come with APRs of just under 8%. This is good news, as the average rate charged on a personal loan of this size was a whopping 9.2% in May.

However, you've probably noticed that all but two of these loans come with conditions that may prevent you from taking it out.

Nationwide's loan is the cheapest on the table, but it is only available to existing Nationwide customers who hold its FlexAccount current account.

Similarly, Sainsbury's Finance's loan comes in at a competitive 7.9% APR, but this rate is only available to customers with a Nectar loyalty card.

Meanwhile, the loan from YourPersonalLoan.co.uk offers an attractive rate of 8% but is only available to customers with a mortgage. Although the loan is not secured on your home, you need to be a homeowner to apply for it.

For this reason, I think the personal loans on offer from Alliance & Leicester and Tesco Personal Finance are great products.

Both will suit anyone unable to apply for Nationwide's cheaper deal, and neither come with any tricky catches.

Top tips to remember

If you're considering one of the personal loans in the table above, there are a few important things you should bear in mind before applying. I'll run through them here.

1. It's a good idea to check your credit report before applying for a market-leading deal like those above. If there are blemishes on your file, you may not be accepted.

2. Make sure you arrange to repay your personal loan over a period of time you can afford. However, remember that the longer it takes you to repay your loan, the more expensive it will be.

3. Be wary of the repayment holidays that might be on offer from personal loan providers. While these may sound attractive, it is usually the case that during the two or three months you are making no loan repayments, interest will be accruing on your debt - making it more costly in the long run.

4. When you compare loan deals, don't forget to look at the total amount repayable (TAR) on each loan as well as its headline interest rate (APR). The TAR will take into account any repayment holidays that might come as compulsory extras on certain loans, plus any other fees or charges that may apply.

For more helpful hints on getting a loan, read Victoria Bischoff's article 'Six top tips for taking out a personal loan'.

Is a loan the right way to borrow?

Finally, before taking out a personal loan, it's important to be sure that it's the right way for you to borrow.

Factors such as how much money you need and how long it will take you to repay your loan are crucial. For example, as a general rule of thumb personal loans for smaller sums are more expensive than those for larger amounts. If you need to borrow less than £7,000, it is likely that the APR attached to any personal loan you choose will be significantly higher than those quoted in the table above.

In this instance, it might make sense to use a long term, low rate credit card or a credit card with a 0% on new purchases deal.

However, if you choose to use plastic rather than a personal loan, it's crucial that you discipline yourself and stick to a repayment plan that will allow you to clear your balance within the promotional period on offer.

If you don't, you'll find your credit card's standard APR will apply as soon as your low-rate or interest-free benefits expire.

Read the article 'When a personal loan is the right way to borrow' for a fuller explanation of when a loan could work for you. You may also want to read 'The cheapest way to borrow now' if you require further information on 0% purchases cards.

**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**